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Tax incentives and economic development By P.
Guruge Despite these
revenue concerns many countries adopt such tax incentives in order
to accelerate the growth and development. Especially among developing
countries such as Sri Lanka it is very difficult to eliminate such
incentives even with the moderate tax rates applicable in general.
In Sri Lanka tax incentives are administered through two agencies.
The Board of Investments (BOI) of Sri Lanka administers different
tax exemptions basically with a view to attract foreign direct investments.
The other agency is the Department of Inland Revenue (DIR) which
administers such exemptions under the Inland Revenue Act. At present,
many such incentives granted by these two agencies very often carry
similar terms and conditions, since there was a displeasure among
investors on the preferential treatments given to BOI investors.
However, it is practically impossible to extend 100% equal terms
and conditions under both these agencies. For example many BOI incentives
include customs duty and exchange control concessions whereas DIR
incentives include these concessions. As a result
of Budget Proposals 2002 and 2003 a comprehensive tax incentive
package has been developed with effect from March 4, 2002 under
the BOI as well as under the Inland Revenue Act. Regulations relating
to such BOI incentives have been published in the Gazette (Extra
Ordinary) No. 1268/9 dated 26.12.2002. However, a few changes are
to be effected to these regulations to accommodate the subsequent
policy decisions made by the government. The purpose
of this article is to examine the tax incentives available under
the Inland Revenue Act. Position up
to 1.4.2002 There was a
two tier incentive system 1. Taxation
at a lower rate - Certain sectors have been afforded with the facility
of a lower maximum rate of tax. * Profits and
income from Agriculture - This includes cultivation of land, animal
husbandry, fishing and plantation management services. * Profits and
income from Tourism - This includes hotels and guest houses approved
by the Tourist Board, Class "A" or "B" approved
restaurants, travel agents, tourist transport and approved recreation
or sports facilities for tourists. * Profits and
income from construction work - This includes the construction of
any building, roads or bridges, or water supply, drainage or sewerage
systems by a resident person. In these activities the lower tax
rate is not applicable to non-resident persons. * Profits and
income from non-traditional exports including deemed exports to
such non-traditional exporters. - Non-traditional exports include
certain specified services provided for the payment in foreign currency
as well as in addition to the export of non-traditional products. All these activities
were qualified for 15% maximum income tax rate under section 39
of the Inland Revenue Act No. 38 of 2000 and such rate is applicable
to companies individuals and other entities. 2. Tax Holidays
- The following
tax holidays were available. * An undertaking
carried on by a company involving the following- Agriculture
(other than tea, rubber, coconut or paddy) animal husbandry, fishing,
processing of any such produce by the producer or any other specific
products (dehydrated or pickled vegetables and vegetable juices,
starch from tapioca, edible oil other than coconut oil or gingerly
oil desiccated coconut manufactured under a continued process) or; - produce of
any Export Production Village Company - A five-year
tax holiday is applicable from the year of commencement of business
if approval has been granted by the Minister of Finance prior to
1.04. 2002 (section 17 and subsequent amendments to the Inland Revenue
Act No. 38 of 2000). There was another tax holiday granted to agriculture
as follows: - A 10 year
tax holiday is applicable if the following undertaking has commenced
the business between 1.04.2000 and 01.04.2002. Agriculture (other
than tea, rubber, coconut), production of certified planting materials,
research work to improve the quality of such planting materials
if such undertakings were carried on by a company. No special approval
is required. (Section 19 and subsequent amendments to the Inland
Revenue Act No. 38 of 2000). * Notwithstanding
the lower tax rate mentioned earlier in relation to non-traditional
exports a 10 year tax holiday has been granted to the following
activities commenced by a company between 1.04.2000 and 1.04.2002.
Export of fresh or processed vegetables including betel leaves and
cultivation of land not less than five acres extent with vegetables
or fruits. No special approval is required. (Section 20 and subsequent
amendments to the Inland Revenue Act No. 38 of 2000) * Infrastructure
facilities - Any person or partnership which commenced the business
of providing refrigerated transports cold room storage or connected
services between 1.4.2000 and 1.4.2002 will be entitled to a five
year tax holiday from the year of commencement of business. No special
approval is required. (Section 18 and subsequent amendments to the
Inland Revenue Act No. 38 of 2000). Any undertaking
carried on by a company in developing maintaining or operating or
developing, maintaining and operating an infrastructure facility
of a warehouse, store, industrial park, sanitation or solid waste
management systems or supply of electricity, water or urban housing
will be entitled to a tax holiday period if the relevant business
has commenced between 1.04.2001 and 1.04.2003: Other requirements
have been published in the Extra Ordinary Gazette No. 1274/10 dated
06.02.2003 (Section 18A and subsequent amendments to the Inland
Revenue Act No. 38 of 2000) * Export of
handicrafts - Any person
or partnership engaged in export of handicrafts which conforms to
the standards specified by the Sri Lanka Handicrafts Board will
be exempted from income tax during the period 1.04.2001 to 31.03.
2004 on the profits and income attributable to such exports. Export of handicraft falls under non- traditional exports mentioned earlier and export of other handicrafts will be taxable at 15%. Regulations have been published in the Gazette extra Ordinary Nol244/9 dated 01.07.2002. (Section 20A of the Inland Revenue Act No. 38 of 2000). To be continued next week
The concessionary
tax rate regime explained earlier will continue to operate even
after 1.4.2002. However most of the tax exemptions other than sale
of gold gems or jewellery, construetion and sale of houses, export
of handicrafts (up to 31. 3. 2004) and specified infrastructure
projects (up to 31.03.2003) will not be applicable to any business
commenced on or after 1.4.2002. Therefore the
following exemptions will be important for such business- * A five year
tax holiday will be available from the year of making profits or
any year not later than two years from the commencement of commercial
operations whichever is earlier to a company engaged in any of the
following undertakings on or after 1.4.2002. Agriculture
(Plantation of any crop and rearing of fish). Agro processing
(processing of any agricultural, farming or fishing produce) Industrial
and machine tool manufacturing and electronic products. Information
Technology and allied services Any designated
project - The Regulations relating to such projects have been published
in the Gazette (Extra Ordinary) No. 1 272/5 of 21.1.2003. The following
activities will be qualified as designated projects. Manufacture
of ceramics, glassware or other mineral based products, rubber based
products and light or heavy engineering industrial products. Provision
of refrigerated transport or cold room storage services. Export
Production Village Products. Management of any offshore company
or maintaining a back office in relation to any activity in a foreign
country. Any other project with an investment exceeding Rs. 250
million (as amended). For the purposes of this exemption the export
of non-traditional products means export of any such goods including
deemed exports not less than 80% the total value of production for
any year of assessment. A further period
of two years after the tax holiday period will be taxed at 10% Thereafter,
if qualified for 15% such rate will be applicable. Otherwise the
rate will be 20%. (Section 21A
and subsequent amendments to the Inland Revenue Act No. 38 of 2000) * Infrastructure
projects carried on by a company on or after 01.04.2002 development
of any airport, sea-port, highway or railway, any industrial park
warehouse or store or provision of any sanitation facility or solid
waste management system, power generation, transmission or distribution,
or any water services or Urban housing or town centre development
will be entitled to a tax holiday as follows - (as amended). Rs. 1000 mln
6 years The exemption
period will be calculated from the year in which the undertaking
commences to make profits or any year not later than two years from
the commencement of commercial operations which ever is earlier.
The tax rate applicable after the tax holiday period will be 15%
(Section 21 B and subsequent amendments to the Inland Revenue Act
No. 38 of 2000) * A five year
tax holiday will be available to small scale infrastructure undertakings
carried on by a company on or after 1.4.2002 with an investment
not less than Rs. 10 mln but not exceeding Rs. 50 mln in the areas
of power generation, tourism and recreation, warehousing and cold
storage, garbage collection or disposal, construction of houses
or construction of hospitals from the year in which the undertaking
commences to make profits or any year not later than two years from
the commencement of commercial operations which ever is earlier. A further period
of two years after the tax holiday period will be taxed at 10%.
Thereafter the rate will be 20%. * Acquisition
of under performing or non-performing industries or other activities
and making such activities economically viable by 31.3.2004 by any
company will qualify for a 3 year tax holiday on the full profits
of such acquiring company. The period of exemption will be calculated
from the year in which the acquired enterprise commences to make
profits on any year not later than two years from the commencement
of commercial operations by such enterprise which ever is earlier.
For this purpose a proposal should be submitted to the Minister
of Finance which should include the provisions for the settlement
of statutory liabilities of such acquired undertaking. The tax rate
applicable after the tax holiday period will period will be 20%
unless such company qualifies for 15%. * Expansion
of industrial undertakings by companies - (A) Undertakings
engaged in non-traditional exports if expanded such projects with
an investment not less than Rs. 10 mln on or before 31.3.2004 will
qualify for a two year tax holiday on the entire profits of the
undertaking. If such company is already enjoying a tax holiday this
additional tax holiday will commence after the expiry of such tax
holiday. (B) Undertakings engaged in other products (other than
non-traditional products for export) if expanded with an investment
not less than Rs. 10 mln on or before 31.3.2004 will qualify for
a two year tax holiday on the profits attributable to such expansion.
A five year tax holiday will be available to companies engaged in
research and development activities on or after 1.4.2003 with a
minimum investment of Rs. 2 mln from the year of profit making or
any year not later than two years from the commercial operations
which ever is earlier. For the purposes of this exemption such research
and development work should be in the specific fields. Normal ordinary
research work will not quality. After the tax holiday period a concessionary
rate of 15% will be applicable. All these new tax holidays require
no specific approval to obtain the tax holiday. Therefore it is
very important to ascertain the correct requirements from the relevant
authorities before the commencement of any project with the intention
of enjoying a tax holiday.
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